Service, Not Servers

Darren Dahl is a contributing editor at Inc. magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, North Carolina.

Contributing Editor, Inc.

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Don't tell Joe Walker that lightning doesn't strike the same place twice. The headquarters of his company, Elcometer, a manufacturer of testing equipment for paints and coatings based in Rochester Hills, Michigan, was hit by lightning three consecutive years starting in 2001. In the first two cases, the resulting electrical surges knocked out the building's power and completely fried every electronic device--including the company's computer servers, which stored critical information such as inventory numbers and customer contacts. Both times, business ground to a halt for 10 days as the company's tech team scrambled to restore the systems.

In August 2003, yet another fierce electrical storm roared through southeastern Michigan. Once again, Elcometer's electricity was out for days. But this time, commerce continued without a hitch. What was different? Six months earlier, Elcometer had gotten rid of its computer servers and instead began accessing all of its sales, inventory, and accounting data online. As a result, employees were able to work from home or from terminals at a nearby Kinko's. "It was a huge difference," says Walker. "All I had to do was get my Internet connection back up and running to get back in business."

Walker is on the leading edge of one of today's most important technology trends--the transformation of software from a product to a service. While computer software has been growing faster and smarter, the industry's business model has been pretty much stuck in about 1990. Developers ship out disks and CDs encoded with their latest release or upgrade, often charging hefty licensing fees. Customers install the software on their local servers, which must be constantly maintained and upgraded to run this ever more sophisticated software--a vexing game of catch-up that usually means keeping a team of tech pros on staff. And when the server goes down so does business.

But that process is becoming as outmoded as VHS recorders. Instead, software makers are making their tools available on the Internet on a pay-as-you-go basis for a monthly subscription fee. Known as on demand, or software as a service, this model has long been familiar to customers of companies such as NetSuite and Salesforce.com. But now nearly all software makers are offering on-demand versions, making it possible for businesses to abandon their servers and instead keep all of their data--from e-mail to e-commerce to human resources--on the Web.

In 2005, companies spent more than $4 billion on hosted software, a number that is expected to grow to more than $10 billion a year over the next two years. While those numbers represent a small portion of the $190 billion global software market, the Yankee Group, a research firm in Boston, forecasts that more than 50 percent of the software purchased by small to midsize companies in 2008 will be from software-as-a-service providers. "This is an evolution in how companies use software, especially small and midsize companies that finally have access to applications they couldn't afford before," says Sanjeev Aggarwal, a senior analyst with Yankee.

The key benefits of working with these on-demand providers are high speed and low cost. To buy and install a traditional accounting or customer-relationship-management system often means waiting months and spending hundreds of thousands of dollars. With software as a service, you can be up and running within days, or even hours, of signing a contract. Since the vendor is hosting both the application and the data, getting started can be as simple as typing in a username and password. What's more, on-demand customers generally pay monthly subscription fees, rather than large, one-time licensing fees. A Yankee Group study found that the total cost of operating an on-demand software package is less than half that for an equivalent traditional system.

In 1999, before the company experienced its first lightning strike, Elcometer used Great Plains, now owned by Microsoft, as its in-house accounting system. But with Y2K looming, Great Plains was requiring its customers to spend $1,500 for an upgrade. Elcometer also needed to upgrade its servers to handle the new software and hire an IT manager to manage it. "I was looking at spending $130,000, plus license fees," says Walker. When he factored in the need to safeguard his company's data from future lightning strikes--or other unexpected events--the decision became obvious. He switched to NetSuite, which charges an up-front fee of $5,000 plus $99 a month per user. "Now, we don't have any servers, we don't have to download the latest updates, and NetSuite fixes any bugs while I'm asleep," Walker says.

On-demand software is especially useful for companies that have computers and data spread out among multiple locations, since everyone from salespeople to CEOs can access their systems from any broadband Internet connection. Businesses that operate in different time zones or countries no longer have to worry about supporting their traveling employees around the clock.

Managing an e-mail server, for example, was particularly troublesome for Fred Aryan, president of LaserShip, a delivery company in Vienna, Virginia. With 150 employees spread out among 15 locations along the Eastern Seaboard from Boston to Atlanta, keeping everyone's computers up to date with the latest patches and spam filters was becoming a nightmare. That's why he switched to HyperOffice, an on-demand provider of e-mail and collaboration software based in Rockville, Maryland. By adopting HyperOffice, which charges about $7 a user per month, Aryan figures he's saving $80,000 a year between software license and hardware maintenance costs. "And that doesn't count getting rid of all the service headaches," he says.

The downside of on demand, of course, is that your business becomes dependent on access to the Internet. Aryan says he struck a deal with HyperOffice to compensate him if his system experiences any downtime (see "What to Ask For in an On-Demand Software Contract"). Security is another concern. Keeping servers in-house may be a pain, but it also means that sensitive accounting or HR data can be locked down behind a firewall. Can the Web offer the same assurances? On-demand vendors insist it can. NetSuite and HyperOffice, for example, either maintain or partner with deluxe data centers complete with the latest in data security and backup technology. Employees can gain access only through secure logins.

Elcometer's Walker admits that he was nervous about keeping his data on the Web. But he's thankful that the decision has saved him from worrying about the nagging problems of maintaining his hardware--not to mention the weather.

Resources

The consulting firm ThinkStrategies offers tips on making the switch to hosted software, as well as a list of vendors, at saas-showplace.com. The consultancy OpSource offers white papers, an ROI calculator, and other resources at opsource.net.